Pensions adequacy and the household balance sheet

The vast majority of automatically enrolled savers are saving at the default rate of 8%. It’s widely acknowledged this is unlikely to provide an adequate retirement income for many people. Yet it can be hard to decide exactly which groups of workers are off-track with their savings rates. Recently, there’s been significant progress towards defining an accurate and meaningful measure of pension saving ‘adequacy’. However, these adequacy measures can’t in themselves tell any given individual whether they’re saving too little – or perhaps too much.

Adequacy benchmarks in pensions have traditionally been focused on relative measures such as income replacement rates. But these are blunt instruments that do not take account of people’s highly varied living standards. For some people, whose consumption may be much lower in retirement than during their working life, a 50% or 67% replacement rate may be too high. For others, it may be too low. The answer depends on the specific financial circumstances of an individual’s household, and how this may change at retirement.

More recently, the PLSA’s Retirement Living Standards, along with the Living Wage Foundation and Resolution Foundation’s ‘Living Pension’ benchmark, have looked to define absolute income standards, related to measures of typical household spending. These initiatives have significantly shifted the terms of debate.

Yet adequacy benchmarks continue to suffer from two major weaknesses, stemming from a narrow focus on pension savings and pension incomes:

  1. Non-pension assets, including housing, and the broader household balance sheet:

Current adequacy benchmarks don’t take into account the ways that people’s household circumstances in working life contribute to their financial wellbeing in retirement. They don’t for instance consider housing wealth, even though owning or renting a home at retirement has an equally significant impact on someone’s financial wellbeing as the value of their pension savings. The impact of carrying debt into retirement is also often ignored.

  1. Changes in consumption and spending power during working age:

Current benchmarks ignore changes in people’s spending power at times while they’re still working. Consumption capacity fluctuates during working life, as the current cost-of-living context demonstrates. Many career paths include periods of non-earning, or reduced wage growth. Retirement income standards that ignore people’s need to cut consumption in different economic or personal situations are likely to urge them to over-save at certain times. Sustained reductions in living standards in working age, at least for reasons other than reduced income, should result in reduced overall retirement saving.

Our research programme

We believe there is a substantial opportunity to build on recent adequacy work to develop a richer model that allows for the enormous differences between the financial lives of different people in different circumstances at different times of life, and for the different strategies they might have. We believe this will allow for better targeting of nudges and other interventions that can help people make the right choices at the right times.

Our programme of work, supported by Phoenix Insights, is building upon the PLSA benchmarks by overlaying data on the household balance sheet and the cost of living to create a proof-of-concept approach. We’ll then explore how this approach could be scaled to actionable adequacy models that pension schemes and policy-makers can use.

Our research will explore the following questions:

  • For any given group of pension scheme members, what are the near- and long-term trade-offs involved in assigning each pound of a worker’s earnings to a pension plan, rather than other uses?
  • Which groups of workers might be over- and under-saving for retirement?
  • To what extent can scheme defaults meet the needs of different groups of savers?
  • What does this tell us about the interventions that may be needed at different life stages or at key milestones?

About our programme partner

Phoenix Insights is a think tank set up by Phoenix Group to transform the way society responds to the possibilities of longer lives. They use research to lead fresh debate and inspire the action needed to make better longer lives a reality for all of us. The core of their work is focused on financial security, work, and learning and skills. Reimagining longer lives means making changes in all these areas. At the heart of all of Phoenix Insight’s work, they are committed to reducing inequalities and building a society that enables all of us, not just the fortunate few, to live better longer lives. For more information, visit:

Our research

  • explore the gaps in current adequacy models that are based on either replacement rates or consumption targets
  • understand the effects of different levels of pension savings on the short, medium and long-term financial experiences of households under a range of different conditions
  • draw conclusions about the correct strategies, data sources and models to be used in calculating ‘adequate’ savings rates for different groups of workers.

The first phase of this work will include:

  • expert interviews and a private roundtable
  • desk research review
  • gap analysis of existing adequacy models
  • identification of third-party data sources that a scheme such as Nest could combine with its own data to fill key gaps
  • development of an outline model demonstrating how the source data and segmentation approaches could be used to model adequacy on a case-by-case basis.

The second phase will include:

  • development of an indicative range of segments and scenarios characterising the circumstances of different pension savers
  • modelling of possible future outcomes for each segment during working life and retirement to determine adequate savings rates for each.